As a medical specialist, you’re in a unique financial position. Through your years of schooling, you’ve accumulated an extraordinary amount of student loan debt, but your earning potential is equally significant.
Doctors and other healthcare professionals pay between $365,000 and $440,000 on average in student loan debt and interest.1 That’s almost 10 times the amount an average non-medical student borrows! 2
But with a high earning potential, determining the right way to allocate your wealth is an enormous challenge. While it may be instinctual to pay down debt as quickly as possible, you must also think about preparing for your future.
How can medical specialists balance paying off debt and investing for what’s to come?
Balancing Your Financial Priorities
Even with a mountain of student debt on your back, you don’t want to put your other financial priorities on hold. So, how can you realistically accomplish both?
Start by identifying your financial goals—all of them. Your list may include saving for retirement, paying off your student debt, buying a home, paying for a wedding, funding a child’s education, obtaining additional training, etc. From there, order your goals from most important to least.
The goals that fall to the bottom are the ones you don’t need to worry about right away. Say you aren’t planning to start a family for another few years, so you can put college planning on the back burner. But you may have a unique opportunity for a residency that would require an out-of-state move, and you want to buy a house there.
But three financial goals should be vying for the top spot. Let’s take a closer look.
Properly investing for retirement is perhaps the most important goal for new and seasoned physicians alike. Since you spent so many years in school, your investment time horizon tends to be shorter to amass the savings you’ll need for a healthy retirement plan.
Max out your retirement contributions now to take full advantage of growth over time. The sooner you start contributing, the longer your savings have to accumulate compounding interest.
Before addressing your other goals, check in with your emergency fund. Your emergency fund protects you when life doesn’t go your way, like a job loss, death in the family, significant property repairs, unexpected medical bills, etc.
How much to include in your emergency savings differs from doctor to doctor, but three to six months’ salary is a good rule of thumb. Again, as a high-earner, this can be a significant amount of money and therefore take a bit of time and dedication to achieve.
Start by initiating an auto-draft of $100-200 a month from your checking account to your emergency fund. Employing automation helps bring consistency to your savings.
Student Loan Debt
Paying back student loan debt is a priority, but it doesn’t have to take the top spot. Instead, it’s something that should remain on your radar and be addressed consistently.
An advisor who understands your unique financial position can work with you to create a plan for paying down debt and address questions you may have.
For example, if you receive a bonus at work or inherit a large sum of money, is it best to put it towards debt or retirement savings? These are the considerations a knowledgeable advisor, such as the team at Partners in Financial Planning, can help you address.
How to Pay Off Debt as a High Earner
There are several ways physicians and doctors can address their student loan debt, which we’ve identified below.
Public Service Loan Forgiveness
If you work for a qualifying employer, you may be eligible for Public Service Loan Forgiveness (PSLF) after making 120 monthly payments.3 If applicable, the PSLF program would forgive your remaining federal student loan debt.
To qualify, you need to meet the Dept. of Education’s criteria, which include:3.
- Be employed by a non-profit or a U.S. federal, state, local, or tribal government.
- Work full-time.
- Have Direct Loans.
- Repay your loans under an income-driven repayment plan.
- Make 120 qualifying payments.
In Oct. 2021, the Dept. of Education changed the PSLF program temporarily due to Covid-19. For a limited time, borrowers can receive credit for past repayment on loans that would not otherwise qualify for the program.4 In addition, past repayment periods will count on a qualifying repayment plan regardless of whether you made a payment, made it on time, or for the full amount.4
If you think these changes may impact your student loans, feel free to reach out, and we can discuss your situation in more detail.
You typically have a couple of options when it comes to repayment plans. You can apply for an income-driven repayment plan or opt for the standard plan.
An income-driven repayment plan looks at your most recent tax return to offer a monthly amount deemed affordable based on your AGI (adjusted gross income). This means the amount you pay may fluctuate year after year as your income and family status change.
Income-based plans typically stretch out the life of the loan to 20 or 25 years. This timeline is something to consider, as you may end up paying more in interest over the life of the loan.
A standard repayment plan usually spans 10 years, with a fixed amount paid each month. This plan offers predictability and keeps the life of the loan to a minimum.
As you consider your options, it’s essential to keep both short- and long-term impacts in mind. While you may have smaller payments now on an income-driven plan, more money will go towards interest over the life of the loan. Conversely, the monthly amount on a standard plan may stretch your monthly budget too thin.
Additional Principal Payments
Shortening the life of the loan can be as simple as putting a little extra towards your loan every month. If you can, consider making extra payments towards the loan’s principal regularly, like monthly, quarterly, or even yearly.
Remember: the sooner you pay off the loan, the less interest you’ll shell out over time.
Federal Student Loan Moratorium
Federal student loans have been on a moratorium since the start of the pandemic, meaning you do not need to make monthly payments, and they are not accruing interest. The government set the moratorium to end after January, but they recently extended it until May 1, 2022.
This is a rare opportunity that has allowed borrowers a temporary reprieve. If you haven’t yet, take this extra time to evaluate and strategize your repayment plan. Reallocate what you’d typically put towards student loan debt to another priority, like retirement savings or a house fund.
Working With Partners in Financial Planning
We specialize in helping doctors, physicians, and medical specialists prioritize and manage their financial well-being. Schedule some time to talk, and we can create a plan that addresses your unique priorities and debt repayment questions.
We can connect you with our student loan consultant, who will help make student loan repayment a seamless part of your greater financial plan.
Partners in Financial Planning provides tax-focused, comprehensive, fee-only financial planning and investment management services. With locations in Salem, Virginia and Charleston, South Carolina, our team is well-equipped to serve clients both locally and nationally with over 100 years of combined experience and knowledge in financial services.
To learn more, visit https://partnersinfinancialplanning.com